All posts by Owen Moore

Understand what is forex pips and spread and how it works. These are very important measure of success in forex trading.

Understanding Pips and Lot Size

Pips is the basic measurement use in forex trading to measure price movement. Pip is the smallest price movement in forex trading and pip stands for the acronym percentage in point. Pip is always measure by the last digit in forex price quotes, say you bought EUR/USD at 1.3123 and was able to sell it at 1.3126, you then earn 3 pips which is the difference between the sell price and the buy price. Every pip has a dollar equivalent depending on the lot size a trader is trading. Micro lot 1 pip is equal to $0.10, a mini lot 1 pip is equal to $1.00 and a standard lot 1 pip is equal to $10.00.

Reading Forex Quotes

Let us use the following forex quote for EUR/USD to understand further what is forex spread. Sell price 1.3120 and Buy price 1.3123, this quote means that you can buy EUR/USD at 1.3123 and you can sell it or short sell it at 1.3120. You notice that the sell price and the buy price are not equal, their difference is what we know as spread.

Forex Spread

Most forex brokers do not charge that client with commission fees or brokers fees, how then do the forex brokers earn when we trade with them? The answer is through the spread, which is why one of the selling points of forex brokers is offering low spread to their client. To explain further let say you bought EUR/USD at the buy price of 1.3123 just right after you bought this pair you are already registered a loss of 3 pips because you can only sell it at 1.3120, sell price of 1.3120 less buy price of 1.3123 equals negative 3 or 3 pip loss. The spread actually goes to the pocket of your broker as their income.

This also works the same way when you sell short a currency, the price you pay to sell short EUR/USD in our previous example is at 1.3120, just like your buy order in your sell order you are already at a loss amounting to the spread for a currency.

Every time you enter a trade whether buying or selling short a currency pair you are charged by your broker via the currency pair spread, this is just once every time you enter a trade and when you close a trade this is actually the time when you pay your broker the spread.

During volatile times in the market spread can move from your regular 1-3 pips to 10-50 pips in just seconds this kind of movement happens in anticipation of a great move or when there are favorable or unfavorable economic news that just become available to the market.

Now start talking in terms of pips when you measure profit or loss in forex trading or when you are describing a currency price range. Take advantage of brokers that offers small spread or better yet guaranteed fix spread. Avoid buying or selling during wild movement of price because you increase the risk of getting charge with a high spread.

You will need to be familiar with identifying chart price trend like uptrend and downtrend to better recognize a 1-2-3 chart trading pattern. Keep in mind that an uptrend is a series of higher high and higher low on prices while a downtrend is a series of lower high and lower low on prices, master this and it will become handy on your trading.

The 1-2-3 chart trading pattern is a reversal chart pattern; That is why it should always be preceded by a trend, it could be from an uptrend or from a downtrend. It will be easier for you if you can easily spot a trend since the 1-2-3 chart pattern appears near the end of the trend or when the trend start to lose steam and starting moving sideways.

It will normally start when a trend slowly turns to a trend less movement or sideway move, this happen when it stop registering higher high in an uptrend or stop registering a lower low in a downtrend. The first thing you should do is to connect all the recent high and the recent low to establish a sideway price range. Once the sideway trading range is set and established using the two horizontal line you should start marking the 1-2-3 points in the chart.

Once you have the price inside the trading range mark recent high before the failed higher high as “1” then the low that come next as “2” and the failed higher high as “3”. This is the same for the steps in a downtrend and this is the main component of the 1-2-3 chart trading pattern.

The trading signal will be generated once the price moves below or above the price leveled as “2”. A move downward to break the recent low also marked as number “2” is a sell signal in an uptrend. And a price move to break the recent high or the point mark as number “2” in a downtrend is a buy signal. It is highly effective if you take into consideration oscillator signals for additional confirmation particularly stochastic and MACD.

Your price target will be on the next Fibonacci levels or MAs or better yet a established support or resistance level and because this is a quick trade you should be profitable in the next few minutes and you should quickly move your stop loss to break even or exit the trade if still not on the green zone after a few minutes. You can use this in the hourly time frame down to the one minute chart of course the higher the time the higher its reliability.

No trading pattern is 100% flawless there will be times that it will not work as plan, it always best to protect yourself at all times. Practice makes perfect, that is why you will need to practice trading any pattern you put into your trading arsenal, once you get familiar with the nature of a pattern you start to understand how it moves, how it behave and you start to have a deeper understanding on the psychology behind the trading pattern and start to take advantage of the opportunity presented to you by such trading patterns.

Trading is not just about price on the charts. It is also about the momentum of the price. One has to incorporate the momentum aspect in making trading decisions because price tells only half the story. The other half is told by the momentum. Inferior trade set ups can be avoided if momentum is also looked into.

Significance of Momentum Indicators

It is very easy to identify the major trend by naked eyes. But many times there are minor trends within the major trend. One has to study the charts carefully to see such trends. You can identify minor trends clearly if you use momentum indicators.

Let me explain the importance of momentum of the price. Say you are watching a car going past you. The driver in the car has decreased the speed of the car. You will not feel its decreased speed because you are not in the car. Unlike you, driver in the car will feel the decrease in speed. Price will show you where the car is going. Momentum indicators will give you the feel of the strength of the trend.

Better Trading Decisions with Momentum Indicators

Why is it important to know the momentum? As a trader you will typically be in a trade from few minutes to few days. You don’t want to be in a trade if the strength of the trend is waned. Ideally you should be in a trade when there is a strong momentum going with you. Momentum indicators will show you the momentum of the trend. Let me warn you before proceeding. Momentum indicators should never be used in isolation. Similarly price should not be viewed in isolation. You will trade profitably if you use either of them together. Commonly used momentum indicators are RSI, Stochastic, CCI and William’s %R. You can use momentum indicators differently and get better trading results.

Divergence

The foremost type is to look for divergence. Divergence occur when the price and momentum move in opposite directions. This is a classic trading signal for a trend reversal. Trend takes few days to reverse. The price moves in a trending direction well after the momentum is feeble. Price moves up but the momentum indicator shows the downtrend. This implies that the reversal of a trend is round the corner. Then you should look to trade against the trend.

Look for Crossing of Two Signals

Crossover is another favourite play of many traders. In this method, two signals of a momentum indicator cross each other and generate a trading signal. In case of MACD, a buy trade can be initiated if MACD cuts the signal line from below and goes above it. Similarly if MACD line crosses the signal line from above and goes below it, sell signal is generated.

Take into Account Extreme Conditions

Momentum indicators can also be used with overbought and oversold levels. RSI and Stochastic are the two most important momentum indicators which depict these conditions. Such indicators are used to make better entries and exits.

Momentum indicators help you in identifying, confirming the trend and reversal of a trend. It should always be used with other technical analysis tools such as price action, volume etc. Good set ups are those which go in your direction quickly. If you understand how to use momentum indicators properly, you can make a lot of money without much stress.

Trading is a very long journey. Very few traders have the patience to walk through the process. This process begins with putting money in the real account and hoping to make quick bucks quickly. But having sacrificed few accounts and the emotional pain, one comes to a conclusion that it is a herculean task. So how can one reach from this point to become a successful trader? The only way is to be patient and start studying the art of trading. One has to be open to all sources of knowledge regarding successful forex trading. There are many ways to improve your trading performance.

Learn from mistakes of Others

Mistakes are the integral part of trading. There are few common mistakes most traders make when they start. Once you know these mistakes, you might at least know what to avoid. One does not have to commit mistakes to learn. It is an intelligent approach to learni by avoiding mistakes.

Get a Mentor

One easy way to do this is to get a mentor. The advantage of having a mentor is that it will minimize your learning curve. One can still face the difficulties in trading. But mentor will help and guide you through this process especially in the light of the fact that he has seen all that. Mentor is aware of these mistakes and can give insights on how to deal with them. Having mentor eliminates the noise in the process.

Choose a Mentor Wisely

You can find numerous mentors over the Internet. They live in different parts of the world. But it doesn’t matter in the age of Internet. You can always contact them via email, phone etc. You will have to select the mentor carefully. Mentors reveal their trading approach on the website. Study their trading strategy. Read their blogs. Get an idea of their trading strategy by watching videos if available. If everything looks good then you can go ahead. Be aware of trading gurus who use flashy advertisements.

Read Books

One effective way of acquiring knowledge is to read trading related books. There are some excellent books on trading. These books will tell you the logic behind a particular trading strategy or a particular indicator. If you are a price action trader, you should know why pin bars are formed and what information they convey? Reading books will help you in becoming a profitable trader as you will know why you are doing something.

Blogs, Video and Newsletter

Some other ways to keep abrest with the markets are blogs, videos newsletter etc. Many forex experts write blogs and they comment about the trading. These are some of the cheapest form of acquiring the knowledge, as I don’t know any blog that charges you for reading. Newsletters are also very insightful and you don’t have to search for new posts as you get them right in your inbox.

Trading is hard. If you keep learning, the roadblocks on the road will be fewer. If you have a thirst for knowledge, you can be successful at trading. Be prepared to assimilate the knowledge from every direction. Being a successful trader is not impossible.

Many traders forget the reality and fail in the business of trading. Reality check is applicable for every aspect of your trading activity. Be it a trade or management of your account, you should tread with realistic expectation and analyze the situations by keeping the reality in mind.

Expect Realistically

Realistic expectations are essential for successful trading. Many novice traders take up trading with a dream of turning few thousand dollars into a million dollars and that too in few days or weeks. You will likely to over trade for realizing your unrealistic dream of becoming millionaire quickly. Over trading is a sure path to blowing up your accounts.

What does it mean by realistic expectations? Let’s assume that you trade conservatively and put only 2% of your account on the table on every trade. For 5 trades every month, you risk a tenth of your account every month. If you achieve 70% of the winning percentage, with a conservative expectation of risk reward ratio of 1, you can expect to grow your account 7% each month. This is a rough idea of how you should approach your trading expectation.

Expect and Take Realistic Profits

You should determine the both ends- maximum profit and maximum loss from a trade before entering it. Target and stops should be predefined before entering a trade. This is where a realistic assessment of the situation comes into play. Numerous trading strategies are traded worldwide. The profit targets should be decided logically and not by emotionally with unrealistic expectations. One should not aim hundreds of pips with a very tight stop loss. You should study different exit strategies.

Don’t Forget Stops

A trader should never compromise on the stop loss. Trading without stops is like driving a car without breaks. A trading strategy plays an important role in determining the stop loss. You should not call a losing trade a positional trade and keep it without any logical explanation to it. On the other hand keeping a small stop loss without any logic is also bad trading practice. Let me remind you that there are trading strategies which follow strict stop loss.

Accept the Mistakes

You as a trader should assimilate the fact that you are not going to win all the time. It is very difficult thing to accept that you have committed a mistake. But if you understand this human behavior and accept it, you will also accept your trading mistakes. It will keep you away from a bad practice of keeping a losing trade because you can not accept a mistake on your part. It is your responsibility to judge the situation objectively.

Reality check is nothing but an ability to see what is going on objectively. When you are emotionally detached from the decision making process, you see the things the way they are and make better trading decisions. Practice will make you a smart trader. Accept the reality and become a successful trader.

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